In these economic times, people look for any signal of stability. Sirius XM Radio (SIRI) has indicated that they are on the cusp of something good, but the street is still wanting more evidence that the equity has upside potential. Promises of better numbers tend to fall on deaf ears when filling up the car with gas presents challenges to the household budget that simply did not exist before.
Satellite radio investors have weathered the storm thus far, and seen the equity bounce back from a nickel to a share price 10 times that amount. Those that invested that low already have a healthy profit to protect. The question is where the upside potential for Sirius XM rests. One metric that has oft been overlooked is where the bonds for the company are trading.
One bellwether for Sirius share price is the 2013 9.625 coupon bonds. These bonds have existed for some time, and represent debt due in 2013. These very bonds traded as low as 20 cents on the dollar during the depths of the credit crisis and the potential for Sirius XM bankruptcy. Last week they traded as high as 90 – levels not seen since well before the merger. This represents near par, and is considered an indicator of the perception of Sirius XM’s ability to pay their debt.
Like it or not, there is a sentiment that bond traders are “smarter” than stock traders. The bond market is fueled by reading the real and demonstrated ability of a company, while the stock market tends to be more of a bet on potential. Bonds can be thought of as the more conservative investors exhibiting confidence in the company. So how does bond strength bode well for shareholders?
The last time these particular bonds traded at this level the stock was about $1.50. Now, to say that the stock should be there today would be a bit far fetched. We need to consider the fully diluted share count. The company now has double the shares, and thus, accounting for that dilution, it is arguable that the stock should be trading at a level between $0.70 and $0.75.
Some may argue that Malone is acting as a backstop for the company, and that this gives strength to the bonds. That is a sound argument, but I would counter that if Malone’s position in Sirius XM is strengthening the bonds, why should it not also strengthen the stock? If the belief is that Sirius XM’s debt picture is well under control, it should take some worry out of the stock. Between better cash flow, improving metrics, and the security brought by the Malone deal, there is little reason why the equity can not enjoy a bit of upside from current levels.
In fairness, there has been a lot on the downside for Sirius XM. Weak auto sales combined with subscriber losses, and GAAP losses that were higher than the street expected are all issues that can weigh on the stock. However, if the “smarter” bond players are seeing the potential in the company, the equity players can’t be far behind.
Simply stated, the bonds are trading near par, and that aspect of news has not yet been digested by the street.
Position – Long Sirius XM Radio